PRESS MENTIONS

Getting Your Foot in the Door: Approval Process for Co-ops & Condos

By
Adam Leitman Bailey

By: Greg Olear

September 29th, 2015

Buying an apartment in New York can be a real odyssey—finding a place that fits your budget and other requirements, securing a mortgage, gathering reams of paperwork for the closing…all very stressful and tedious. But for those buying into co-op—and increasingly, some condo—buildings, there’s another hurdle to factor into the process: the board approval.

The ordeal of getting approval from a co-op admissions committee in the Big Apple is so notorious that books, news stories, and even plays have been written about the experience. Flamboyant celebrities like Courtney Love and Madonna and politicians like the late president Richard M. Nixon have been denied entrance to some of the city’s pricier co-op apartments by finicky boards. Let’s take a look at what in involved when boards give the thumbs down.

Who Do You Think You Are?

At first blush, it may seem petty, if not outright cruel. An owner finds a buyer for her apartment, contracts are signed…and the deal collapses because the board shoots down the buyer. The buyer is angry, the owner possibly more so. Why on earth would a board do such a thing?

“Generally, it must be kept in mind that we all live in close proximity with our neighbors and we share amenities,” says Stuart Saft, a partner with the Manhattan law firm of Holland & Knight. “It is virtually impossible to evict someone in New York City even if they misbehave or disturb their neighbors or fail to pay their maintenance. The board approval process may seem ‘snooty’ to some, but to those of us who live in these buildings and serve on the boards, it provides a measure of protection from a difficult resident—i.e., the one who flouts the rules because he or she can do anything they want in their apartment.”

This being New York City, ‘difficult’ residents do tend to pop up from time to time. As with mice or bedbugs or any other potential menace, the best way to get rid of them is to not let them in the building in the first place.

“As a long-standing board member and attorney representing boards, I can assure you it is the board members who suffer the most if they guess wrong on their neighbor,” Saft says. “Imagine spending your life savings and borrowing money to buy an apartment and then have someone move in above you who sets up a basketball hoop in the apartment for their kids, or moves in next to you and screams at his or her spouse all night. Or imagine being elderly or having young children or having asthma and having someone who smokes like a chimney move in next to you. This isn’t about snootiness; it is about maintaining a quality of life.” This holds in all five boroughs of the city, even the less-glitzy ones. “It doesn’t make a difference whether you spend $10 million on Fifth Avenue or $200,000 in Canarsie,” says Saft. “You have a right to the quiet enjoyment of your home.”

Two recent news stories just centered on an East Side board that asked to interview the woman’s minor child in order to detect any behavioral issues. Also there have been instances of boards seeking to so-called interview a buyer’s dog to determine if the pet is well-behaved, as well.

But what makes a potential resident difficult? And how can you detect this up front? The most obvious way is also the least potentially divisive: money. Both co-ops and condos are organized in such a way that if one unit is in arrears, the entire building suffers. Put into geopolitical terms, if your building is the European Union, you want to sell to Germany—not Greece.

“It is almost always a concern about the purchasers’ finances because if they default,” says Saft. “It isn’t a landlord in Scarsdale who is going to make less profit—it is all the other residents who are going to be required to pay more while the board spends a year or two attempting to evict the deadbeat neighbor.”

Show Us the Money

In order to determine whether a prospective buyer will be an asset to the community rather than a liability, “The first thing that has to happen is that the applicant has to submit a complete application package,” says David L. Berkey, a partner with the Manhattan-based law firm of Gallet Dreyer & Berkey, LLP.

“Then the next step is the board will review the application package, and that review generally is done for financial analysis—whether or not the person has the capability of paying the maintenance charges in a co-op, or the common charges in a condo, and also seeing whether or not the person meets the criteria that the board has set for financial strength.” This can be fairly explicit, depending on the bylaws.

“In some buildings, a person has to have a net worth of a certain amount, and has to have a certain amount of that net worth liquid enough so that person can pay the maintenance or common charges without any trouble.”

Because the financials are the first factor in the decision—and because real estate in New York is not cheap—most of the time, when a buyer is rejected it’s because of concerns about money. “You’re allowed to discriminate based on wealth,” says Adam Leitman Bailey, an attorney and founding partner of Adam Leitman Bailey, PC in Manhattan. “You can reject someone because you don’t think they’re financially qualified to be in the building.”

And sheer numbers aren’t the only part of that qualification. A board might have concerns about where the money comes from. Take, for example, “if someone appears to be running a cash business,” says Berkey. “And although their tax returns show a low amount of reported income, they have an enormous amount of money and are using cash to buy. The board may be concerned about the legitimacy of the buyer’s source of money.”

Bailey has had similar experiences. “I represented a client who was a former Mafia member, and he was in the witness protection program. So he can’t even give his real name to the condo board. And the board is going nuts. He had the money, and he was willing to pay cash, but there was a famous female celebrity who lived in the building, and she wanted info.” The board turned him down.

When It’s Not About Money

Having inadequate or possibly-shady funds is pretty a pretty straightforward reason to reject a buyer. The tricky part, from the board’s perspective, is knowing when—and why—to reject a potential buyer for non-financial reasons. This is the stuff that comes out during the second part of the application process: the interview. Here, boards must exercise extreme caution, so as not to violate federal law that prohibits discrimination based on race, ethnicity, age, disabilities, religion, gender, sexual orientation, marital status, familial status or country of origin.

“After 9/11, I got a lot of calls from boards wanting to keep people of Middle Eastern descent out of their buildings, because they were afraid of terrorism,” says Bailey. In addition to being prejudiced and irrational, such a move would also be illegal. “I told them, it’s not worth the discrimination lawsuit for you rejecting them based on nationality,” says Bailey. “You’re not allowed to do that, and insurance will not cover you.”

But there are tacks boards are allowed to take in an interview. Not everything is protected under law. “It’s illegal to discriminate based on family status or children,” says Bailey, “but you certainly can reject someone if you believe they’re going to be having parties every weekend. You want to know if they’ll be running a business out of the place. You’re allowed to have a home office, but you don’t want to go through eviction procedures if they decide to run a business and people or clients are going to be coming in and out constantly. And you also don’t want the home to be the type of business where they have desks, and everything set up like that.

They Don’t Fit In

Even more intangibly, it often boils down to ‘fit.’ “The interview is very important because every building has a unique way of living,” says Bailey. “There are many buildings that are younger, and many that are older, and many that have people who grew up poor, and others that are snobby and pristine. And other buildings are more like families, and they allow you to get away with more stuff—while other buildings won’t allow you to sit in the lobby.” The idea is to make sure the new applicant is not egregiously mismatched with the rest of the building’s residents.

“It’s about who the people are,” Bailey continues. “Are you worried they’ll be carrying a gun? You can reject them for any reason except race, religion, nationality, creed, or family status. So, anything else… you don’t like their hair color, they come in with a bunch of tattoos or earrings, and you want to reject them because of that, because it doesn’t fit into your building, that’s actually legal in New York. You don’t like their orange hair… that’s a [legitimate] rejection.”

It’s tempting to believe that the Madonnas and Courtney Loves of the world are turned down merely because boards want to flex some muscle, but such rejections are usually related to the publicity associated with the celebrity of such applicants, and not necessarily their personality.

Likewise, it’s easy to imagine the board who rejected Richard Nixon to be a tight-knit group of inveterate Marxists, but but the reason for his rejection was actually much more prosaic.

“The reason President Nixon was rejected from a co-op was due to the Secret Service’s requirement that no one else could be in the elevator when Nixon was in the elevator,” Saft explains. “In a prewar building with one elevator serving a line of apartments, that rule would have inconvenienced Nixon’s neighbors.”

Co-ops have an easier time rejecting buyers than do condos, who cannot turn anyone down outright but must instead exercise right of first refusal. “If the condo’s bylaws give the board a right of first refusal, the condo board has the right to buy or lease an apartment for the same price as a purchaser if the condo board wants to exercise such a right,” Saft says. “Usually the condo board will find an acceptable buyer and then flip the contract to them. Sometimes if the condo board thinks the price is too low, they might buy the apartment, fix it up and then resell it and add the profit to the condo’s reserves.”

For now, cooperative boards are not required to disclose the reason for a rejection. “There’s been a bill pending in New York City for many years that’s trying to require co-op boards to reveal their reasons,” says Bailey. “It has not passed. As someone who is general counsel to over 250 buildings, I don’t want it to pass, because I know it’s going to cause a lot of lawsuits. As an attorney who represents shareholders and co-op boards, I’d love it to pass, for the exact same reason… I’ll make a lot more money. But if you have to give a reason for rejecting an applicant, and you say something like, ‘We didn’t feel like you fit into our culture,’ the applicant is going to say, ‘That sounds like discrimination to me.’ It’s going to lead to a lot of lawsuits.” This does not appear to be changing any time soon.

Smoking, a purchaser’s pets, personal habits, and even cooking with the flair of Emeril are only some of the touchy aspects that a board may take into account when considering a new resident’s application for admission but the main sticking point, say the experts, should always be financial.